Shares of Altria Group (MO) are slipping on Tuesday after Morgan Stanley analyst Pamela Kaufman downgraded the stock to Underweight from Equal Weight after reducing her forecasts to low-single-digit earnings per share growth starting in 2019 based on her expectation for accelerated cigarette industry volume declines. Kaufman prefers Philip Morris (PM) to Altria “as EV/EBITDA is at parity.”

SELL ALTRIA: In a research note to investors, Morgan Stanley’s Kaufman downgraded Altria Group to Underweight from Equal Weight and reduced her forecasts to low-single-digit earnings per share growth starting in 2019. The analyst argued that Altria’s “reliable” business algorithm is at risk from shifting demographic trends, category disruption, and “harsh” Food and Drug Administration regulatory objectives. Kaufman’s demographic model points to a 6% annual cigarette volume declines over the next decade due to lower smoking prevalence and a shift toward older and Hispanic smokers. The analyst also sees risk to sustaining 4%-5% cigarette net pricing growth due to an increased mix of lower income smokers and competition from cheaper reduced risk products. Weaker topline growth, limited additional cost savings, higher leverage, and lower share buybacks should drive low-single digit EPS growth, she contended. Further, the analyst told investors that while JUUL gives Altria exposure to a rapidly growing product and offers some hedge to its declining core business, the investment came at an “expensive valuation,” considering JUUL’s reduced financial visibility due to FDA flavor restrictions at retail and potential for more severe FDA regulation to come. Altria’s plan to provide JUUL with shelf space and marketing support enhances JUUL’s competitive threat, Kaufman added. Noting that she prefers Philip Morris to Altria “as EV/EBITDA is at parity,” the analyst believes the former’s recent de-rating is “unwarranted” as the company is not subject to many of the risks impacting U.S. tobacco. Further, Kaufman sees solid global cigarette fundamentals, upside potential from IQOS, and believes Philip Morris has high visibility to high singlie digit constant-FX EPS growth. Moreover, Philip Morris has lower leverage and opportunity to reinstate buybacks to further drive EPS growth, she argued. Kaufman lowered her price target on Altria shares to $45 from $54.

PRICE ACTION: In late morning trading, shares of Altria have dropped almost 6% to $45.47.